Chinese outward foreign investment is shifting from a single cost-driven decision into a complex portfolio of choices. This research maps destination and sector risks across 165 markets, revealing how regulatory, geopolitical, and operational vulnerabilities vary by industry—helping enterprises navigate an increasingly fragmented global trade landscape with targeted entry strategies.
In this Geoeconomic Dynamics Update, we present the latest findings from our upcoming research on the changing risk landscape for Chinese enterprises investing overseas. The analysis introduces the Chinese enterprise sector-destination investment risk index, which ranks 165 potential host markets across ten sectors, using five risk pillars: operational and market feasibility, cultural and societal distance, regulatory and legal compliance risk, macroeconomic and financial conditions, and geopolitical and policy shock exposure. Our goal is to provide strategic guidance to Chinese enterprises to navigate an investment landscape that is more fragmented and more consequential than at any previous point in China’s outbound investment history.
Traditional investment climate tools assess host markets through governance quality, regulatory conditions, macroeconomic stability, and operational infrastructure. These indicators remain useful, but they are often calibrated to the priorities of advanced-economy multinationals; our new index does not challenge these existing instruments; instead, it complements them by incorporating institutional conditions and political-economy factors specific to Chinese firms.
Chinese firms’ outward expansion over the past decade reflects a shifting mix of domestic push factors and external market pull. On the push side, the state has lowered the cost of overseas investment through the Zou Chu Qu (“Going Out”) strategy, the Belt and Road Initiative, policy-bank financing, credit guarantees, and the gradual easing of capital-outflow approval rules. These policy channels reduced financing and administrative barriers for firms seeking overseas markets. Domestic business conditions have added further pressure. Rising labor and land costs have weakened China’s earlier cost advantage, while industrial overcapacity, tighter environmental compliance, weaker profit margins, and intense competition have pushed firms to search for new demand and lower-cost production bases abroad. For manufacturers, overseas deployment can spread fixed costs over larger markets; for overcapacity sectors, it can transfer production pressure outward; and for capital-intensive or state-linked firms, access to policy-backed finance can make overseas projects feasible even when commercial risks are high.
On the pull side, overseas investment is increasingly shaped by market access rather than cost advantages alone. Tariffs, local-content requirements, procurement rules, and rules-of-origin requirements have made export-only strategies more vulnerable, especially for standardized products with thin margins. Firms therefore use localization to preserve access to major demand centers and reduce exposure to trade barriers. This logic is visible in sectors such as electric vehicles, batteries, renewables, and e-commerce, where production, assembly, warehousing, after-sales service, and compliance functions are increasingly placed closer to end markets. Supply-chain regionalization has also raised the value of operating inside major blocs such as the EU, ASEAN, the Gulf, and North America-facing production networks. As a result, Chinese outbound investment is no longer a single cost- or policy-driven decision, but a portfolio of choices over where to produce, sell, source, finance, comply, and manage risk in a more fragmented global economy.
Most destination risk rankings treat risk as uniform, as though every investor faces the same exposure abroad regardless of where their vulnerabilities lie. Our revised index starts from a different premise. For Chinese firms going abroad, risk has layers: the risk conditions present in the destination, the structural exposure of the sector, and the way firms in that sector actually experience those risks. The index therefore separates two questions before bringing them back together: how risky each destination is on each risk dimension, and how strongly should firms in different sectors care about that dimension?
The first sector layer comes from our survey of 222 senior managers and practitioners involved in Chinese firms’ overseas business. Rather than using the questionnaire as a direct country-risk measure, we use the responses to estimate sector-specific sensitivity to five common pillars: operational and market risk, cultural and language risk, regulatory and legal compliance risk, macro-financial risk, and geopolitical and policy-shock risk. The baseline sensitivity measure uses questions on firms’ experienced or perceived frictions, including supply-chain disruption, talent and localization, language and cultural barriers, government and customs restrictions, financing conditions, geopolitical importance, and exposure to policy changes, etc. Because the number of respondents differs across the ten sectors, small-sector estimates are partially shrunk toward the survey-wide mean, reducing the influence of sampling noise without eliminating observed sector differences.
We then complement the survey with objective industry data so that sector weights are not determined by subjective responses alone. Using different datasets from OECD, we construct eight structural measures. These ratios are first constructed within country-industry cells, averaged over the latest available years, and then summarized using the cross-country median. TiVA and Greenhouse gas emissions level measures are converted into sector shares within each country-year before aggregation, so that the resulting measures reflect relative sector exposure. The objective data are then mapped into the same ten sectors used in the survey.
We then combine these two sector layers. The survey provides the baseline sensitivity, while objective exposure acts as a moderator. In the baseline specification, a sector’s normalized objective exposure is translated into a multiplier ranging from 0.85 to 1.15, allowing objective structure to tilt survey-based sensitivity upward or downward by at most 15 percent, but cannot mechanically drive a pillar weight to zero. The five moderated scores are finally renormalized so that the sector-specific pillar weights sum to one. This keeps the Chinese-firm perspective at the center of the index while anchoring it in observable industry structure.
The country side of the index is constructed independently. Destination indicators are direction-adjusted so that higher values consistently mean higher risk and are placed on a comparable standardized scale before being averaged within each pillar. The geopolitical pillar retains a China-specific orientation: UN ideal-point distance from China receives a 75 percent weight, while political stability and democracy receive 12.5 percent each. When a destination is missing one pillar, the final calculation reweights across the available pillars rather than treating the missing observation as zero risk.
The final sector-destination score is the weighted average of the five destination pillar scores using the corresponding sector weights. The current workbook contains 224 destination codes across 10 sectors, producing 2,240 sector-destination scores. In practical terms, the country data determine how much risk is present in the host market, while the survey and objective sector data determine how strongly that risk matters for a particular industry. A Chinese finance firm and a Chinese manufacturer can therefore face the same destination conditions but receive different overall risk scores because their exposure profiles differ.
In this way, the index helps firms ask better questions before they invest: which destinations are broadly safer, which risks matter most for their sector, and what kind of preparation is needed before entry. For example, the risk score for a Chinese EV firm in Hungary reflects both Hungary’s underlying investment environment and the specific priorities of the EV sector, such as regulatory compliance, operational feasibility, macro-financial stability, and geopolitical exposure. The result is a sector-sensitive ranking that helps firms compare destinations through the lens of their own industry needs.
Presented to show the combined investment environment, Graph 1 shows a clear divide between destinations with predictable, business-friendly environments and those host economies where political, institutional, financial, or geopolitical tensions are more severe. The dispersion remains large. The lowest-risk destinations tend to be globally connected economies with strong institutions and stable operating conditions, while the highest-risk destinations are mostly markets affected by conflict, sanctions, weak governance, or macroeconomic fragility. This gives an overall risk environment that firms are likely to face on the ground.
Graph 2 then moves from the overall risk pattern to a more sector-specific view. The world map first gives a broad overview of destination risk, while the drop-down menu allows users to switch across sectors and see how the risk landscape changes. The same destination is not equally suitable for every type of firm. A destination that looks manageable for relatively flexible or lower-sensitivity activities may become less attractive for sectors that depend more heavily on policy certainty, institutional reliability, or cross-border openness. The world map should therefore be used as a screening tool: it helps firms identify which regions remain realistically investable for their own sector, rather than to rely on a single universal ranking of “safe” and “risky” destinations.
Graph 3 shows why both layers matter. Cross-country differences remain much larger than the sector adjustment in most markets: among named destinations, the median gap between the highest- and lowest-risk sector score within the same economy is about 2.7 points on the global 1–100 scale. But the spread is not trivial everywhere. It reaches 10.4 points in North Korea, 8.7 points in the United States, 7.8 points in Israel and 7.2 points in the United Kingdom. The practical value of the sector layer is therefore greatest when firms are comparing otherwise plausible destinations, or when a country combines relatively strong fundamentals with a pillar that is especially important to the firm’s own sector.
Graph 4 explains why the index cannot be reduced to a single destination ranking. From our layered sector weights, different sectors do not respond to the same risk environment in the same way, and the largest weight differs across sectors.
The index should therefore be read as a screening and diagnostic tool, not as a forecast. It captures the relative risk environment facing Chinese firms at the time of measurement, but firms should combine it with real-time market intelligence, project-level due diligence, and their own risk-bearing capacity.
As shown in the table above, the pillar findings suggest a hierarchy for managerial action. For internationally connected service activities, the first question is often whether policy or geopolitical shocks can interrupt the business model. For capital- and execution-intensive sectors, financing, logistics and local delivery capacity become relatively more important. For technology- and knowledge-intensive activities, firms need to consider these exposures together with regulatory, IP and technology-transfer constraints. The point is not that one pillar is universally dominant; it is that the ordering changes with the sector.
The index should therefore be employed as a decision workflow, not as a mechanical ranking. A firm can begin with the overall destination-sector score to identify destinations that fall within its risk tolerance. It can then compare sector-specific scores among shortlisted markets, before looking more closely at the sources of risk behind each score. A destination with a moderate overall score may still be unsuitable if its main risks are concentrated in areas that matter most to the firm’s sector.
The final step is to match the entry strategy to the risk profile. Lower-risk destinations may be suitable for first-wave expansion, regional headquarters, or higher-value functions. Moderate-risk markets may still be attractive, but usually require more targeted preparation. Elevated-risk markets should only be considered when the strategic upside is strong enough to justify the exposure, and when the firm has the financial, operational, and governance capacity to manage that exposure. In this sense, the index is not meant to replace managerial judgment. It is meant to discipline it.
The main value of the index is in making the investment decision more structured. For Chinese firms expanding overseas in a more fragmented global economy, the key question is: “Which destination is attractive for this sector, under this risk profile, and with what form of preparation?” That is the decision gap the index is intended to fill.
Finally, in addition to the general risk assessment, we highlight several upside and downside risks with supply chain implications, in the upcoming three years:
Risk 1: supply-chain regionalization
Risk 2: AI investment
Risk 3: market expansion into developing countries
Director, Asia Global Institute
Research Assistant, Asia Global Institute
Research Assistant, Asia Global Institute
Student Research Assistant, Asia Global Institute
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The University of Hong Kong
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